A Firm Is Expected to Pay a Dividend of $2

question 46

Multiple Choice

A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts believe the stock will be at their target price of $75.00 in two years. Compute the value of this stock with a required return of 10 percent.

• A) $65.40
• B) $66.67
• C) $65.57
• D) $79.14

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Definitions:

Inverted Yield Curve

A situation in the bond market where long-term debt instruments have a lower yield than short-term debt instruments, often seen as an indicator of economic recession.

Long-term Interest Rates

Interest rates applied to loans or debt securities with longer maturity dates, generally over ten years.

Forward Interest Rate

An interest rate agreed upon today for a loan that will begin at a future date, used to hedge against interest rate fluctuations.

Zero-coupon Bond

A bond that does not pay periodic interest, but is sold at a deep discount from its face value and redeemed at full value at maturity.